Microsoft, Skype Deal Takes Aim at Google, Apple

Microsoft's proposed Skype acquisition radically changes the VOIP and video-conferencing game, and maybe alters its competition with the likes of Google and Apple.

Should
Microsoft make good on its intentions to acquire voice over IP provider Skype
for $8.5 billion, it will surely boost the company's competitive stakes with
both Google and Apple.
Under the
terms of the agreement, Skype will become a business division within Microsoft,
headed by Skype CEO Tony Bates. Skype's services will be meshed with a variety
of products in Microsoft's portfolio, including its Lync unified-communications
platform, Outlook and Xbox Live. On a more strategic level, Skype's huge customer
base could give Microsoft considerable influence within the evolving VOIP and
video-conferencing market.

In a May 10
press conference, Microsoft CEO Steve Ballmer suggested that his company would
continue to support Skype on "non-Microsoft client platforms."

He also
painted the deal, the biggest in Microsoft's history, as fundamentally in
keeping with the company's DNA: "This Skype acquisition is entirely in keeping
with our ambitious, forward-looking, irrepressible nature."
While rumors
have circulated for days that Skype was eyeing a partnership or acquisition
with another tech giant, Bates-onstage beside Ballmer-sidestepped the question whether
Google or a similar player had made a deal for the company: "We were very
focused on our IPO, we had an unsolicited offer [from Microsoft], we made an
evaluation."
According to
Ballmer, Skype services will find their way onto everything from television
screens, thanks to integration with Xbox Kinect, to smaller smartphone displays
via Windows Phone-all pending regulatory approval, of course.

The Skype
acquisition also places Microsoft on yet another collision course with Google,
which also offers VOIP services. In May 2010, Google purchased Global IP
Solutions, or GIPS, which makes software for processing high-definition audio
and video over the Web, for $68.2 million. A few months later, the
search-engine giant rolled out a service allowing its customers to make phone calls via Gmail.
Apple also
offers video conferencing via its FaceTime service for iOS. The combination of
Skype, Google and Apple has lifted the number of American adults participating
in online video calls to nearly 20 percent, according to a 2010 survey
conducted by the Pew Research Center's Internet & American Life Project.
Some analysts
believe there's synergy in Microsoft's and Skype's respective offerings.
"Product-wise, this could be a nice fit," ABI Research Senior Analyst Aapo
Markkanen wrote in a May 10 research note. "Microsoft has several areas in both
consumer and enterprise sectors that will benefit from a top-notch VOIP, video
and sharing solution. All of the synergies may never realize, but even the
promise of them goes a long way [toward] explaining why the price may not seem
that right."
Skype may also
help Microsoft in its battle for smartphone market share. "A preinstalled,
well-integrated Skype client could be a potent differentiator for Windows Phone
devices vs. Androids, iPhone and BlackBerry," Markkanen added.
Skype
previously found itself an acquisition target in 2005, when eBay agreed to pay
$2.6 billion in cash and stock for the then two-year-old company. Four years
later, the auction site announced it would resell a majority of its Skype
holdings to a team of private investors for $1.9 billion in cash. By the second
half of 2010, Skype boasted an average of 124 million connected users a month,
and was reportedly trying to raise money for an IPO. However, that offering was
delayed after the company appointed Bates to the CEO role in October.
By snatching
up Skype, Microsoft also prevents another player in the space, such as Google,
from making its own acquisition attempt. "This is as much a -deny' as an
-acquire,'" Rob Enderle, principal analyst of the Enderle Group, told eWEEK May
10. "Microsoft does not want Google to get core capabilities."
But other
analysts nonetheless see some weaknesses in the deal.
"Wall Street
hated the deal when eBay bought it, and they only paid 1/4 of what Microsoft is
now paying," Roger Kay, founder and president of Endpoint Technologies
Associates, wrote in a May 10 email to eWEEK. "In eight years, Skype hasn't
made any money, and even at the operating level, it would take three decades to
pay out in cash terms alone."
However the
acquisition pans out, though, it's undeniable that Microsoft has made a bold
move.

Nicholas Kolakowski is a staff editor at eWEEK, covering Microsoft and other companies in the enterprise space, as well as evolving technology such as tablet PCs. His work has appeared in The Washington Post, Playboy, WebMD, AARP the Magazine, AutoWeek, Washington City Paper, Trader Monthly, and Private Air. He lives in Brooklyn, New York.